Reference no: EM13769509
Mel runs a business that sells earrings over the internet. Every year, she buys one computer for $1000, which is used exclusively for this business, and which has no resale value at the end of the year. A set of earrings costs her $6, including the cost of shipping it to the customer. She can sell as many sets of earrings as she wants at $15 apiece.
Selling one set of earrings takes 30 minutes of labor. For the first 1,500 hours spent working at this business, the opportunity cost of her time is the $15 per hour she could earn as an office receptionist. For each hour of work beyond 1,500, the opportunity cost is quality time spent with her significant other, which she values at $24 per hour.
Finally, Mel needs to buy the computer at the very beginning of the year, but does not get paid by customers until the very end of the year. Otherwise, she would have taken that money and put it in the bank for the full year at a 5% annual interest rate. The business has no other costs.
a. What is the fixed cost of running this business for one year?
b. What is the marginal cost of selling one set of earrings? Does the marginal cost change depending on quantity sold? If so, how?
c. If Mel’s goal is to maximize economic profit, how many bags does she sell?
d. What is the explicit cost of running this business for one year?
e. What is the implicit cost per year?
f. What is the economic profit of the business, per year?
g. What is the accounting profit, per year?
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